Applied Rationality focuses on public policy issues and tries to take a liberal perspective that is consistent (comments to the posts will often show otherwise) with neoclassical, rational-choice economics.

Wednesday, May 12, 2010

Tax rate of 9.2 percent? Not really

Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found.

Some political conservatives such as "Tea Party" activists have criticized federal spending as being out of control. While spending is up, taxes have fallen to exceptionally low levels.

Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis (BEA) reports. That rate is far below the historic average of 12% for the past half-century. The overall tax burden hit bottom in December at 8.8% of income before rising slightly in the first three months of 2010.

The USA Today analysis is interesting but misses a lot of tax payments and other payments to the government.

USA Today obtains its tax percentage by dividing "personal current taxes" paid to different levels of government ($1.1025 trillion in 2009) by "personal income" ($12.0261 trillion in 2009). The calculation, however, misses much (most actually) of what governments takes in.

In 2009, the Bureau of Economic Analysis (the source for the USA Today analysis) estimated that governments took in $3.745 trillion. Of this, $2.4282 trillion came from tax receipts, $0.972 trillion came from social insurance payments, and the rest was either direct revenue for services or returns on government assets.

Government tax receipts included the $1.1025 trillion in personal taxes but also $0.2895 trillion for corporate income taxes, $1.0234 trillion directly assessed on production or imports, and a small amount from foreigners. So, right away, USA Today is missing about $1.3 trillion in taxes that are paid by businesses.

The social insurance payments also are effectively taxes, so you can add another $0.972 trillion to the tax bite. Altogether, USA Today is missing more than two-thirds of what Americans pay in taxes and mandatory contributions.

When you look at total tax payments as a share of the economy (i.e., ignore mandatory contributions), the USA Today conclusion that we are taxed less than in 1950 still holds. The share of national income going to personal taxes is lower, the share going to production and import taxes is about the same, and the share going to corporate income taxes is down sharply.

However, when you include mandatory contributions to social insurance, the tax burden is several percentage points higher in 2009 than in 1950.

Taxes and mandatory contributions as a proportion of the economy are down substantially from their levels in 2008, which raises the question, why weren't the Tea Partiers complaining about taxes then? It wouldn't have anything to do with the change to a Democratic administration, would it?

And of course, the area where payments to the government have held steady go to government programs--Social Security and Medicare--that Tea Partiers hold as sancrosanct.